The Democrats and the fiscal cliff

Not much on the table

DEMOCRATS say it so often that it has become something of a mantra: there will be no deal to resolve America’s fiscal mess unless Republicans agree to higher tax rates on the richest Americans. But they seldom talk about their side of that bargain: the cost-cutting reforms to such entitlements as Medicare, the government’s health-care scheme for the old, and Social Security, its pension scheme, that they are expected to offer in return. As more and more Republicans grudgingly accept the prospect of higher taxes, the Democrats will soon have to decide what they can stomach on entitlement reform.

To judge by Barack Obama’s latest offer in his negotiations with John Boehner, the speaker of the House of Representatives, the answer is, not much. The president will not even discuss Social Security, the White House says, on the ground that it is not a big contributor to the deficit. As for Medicare, the president is willing to make relatively modest savings by passing more of the cost of the programme to drug companies (by haggling for lower prices) and to the rich (by making them pay more for their coverage). Neither of these ideas, while sensible enough in itself, is remotely radical enough for Republicans’ tastes. Nor is the sum the president proposed to save as a result: $400 billion, just a quarter of the $1.6 trillion he is seeking in tax increases.

Such tough talk delights the left, however. Mr Obama’s stance, says the AFL-CIO, America’s biggest trade-union federation, “keeps faith with the voters”. Bernie Sanders, a senator who describes himself as a socialist, has commended the president for his refusal to touch Social Security. “Thanks for fighting to end Bush tax cuts for top 2%,” tweeted Move On, a left-wing pressure group.

Such outfits are anxious to dissuade Mr Obama from repeating the offer he made to the Republican leadership last year, during their previous round of negotiations on the budget. At the time, he expressed willingness to raise the age of eligibility for Medicare and to use a stingier method to increase Social Security payments in line with inflation. Unlike the administrative reforms Mr Obama is now espousing, those changes would reduce the benefits Americans receive under the two programmes. That is anathema to many left-wingers, who want the burden of deficit reduction to fall on businesses and the rich, not the poor or middle-class.

This time around, pressure groups have mounted a ferocious campaign against any reductions in benefits. Before last month’s election the Progressive Change Campaign Committee, another pressure group, persuaded some 200,000 people to sign a pledge stating, “President Obama: If you cut Social Security, Medicare, or Medicaid benefits for me, my family, or families like mine, don’t ask for a penny of my money or an hour of my time in 2012.” Both it and Move On have promised to support primary challenges to Democrats who betray the cause. The AFL-CIO recently released a fact-sheet arguing that changing indexation for Social Security would cost the average retiree $850 a year.

It seems to be working. Some 29 Democratic senators have signed a letter rejecting any changes to Social Security. Fourteen have also ruled out changes to benefits under Medicare and Medicaid. Both Harry Reid, the leader of the Democratic majority in the Senate, and Nancy Pelosi, the leader of the Democratic minority in the House of Representatives, have spoken against cuts in benefits.

Indeed, many Democratic politicians are so worried that Republicans will drive too hard a bargain on taxes and entitlements that they have advocated jumping off the “fiscal cliff” instead. That would involve letting tax rates rise for almost all Americans, and allowing gory cuts to government spending to go ahead. It is not that Democrats want these things; rather, they assume that Republicans would become much less obdurate in negotiations if such calamities were already unfolding.

Peter Welch, a Democratic congressman from Vermont, says that taxes must go up on the rich, but that any savings from entitlements should come from greater efficiencies or bigger contributions from wealthy recipients, not benefit cuts. Republicans, he believes, will not agree to that until the new year arrives, when “all of the middle class will get from John Boehner a Christmas present of a $2,200 tax increase”. At that point, he predicts, Republican opposition will melt away.

The brinkmanship may not come to that point, of course, if Mr Obama strikes a deal first. Although his latest offer to Republicans involved only the most modest entitlement reforms, it seems safe to assume that he has left himself some bargaining room. What is more, he and most Democrats concede that the cost of Medicare and Social Security is rising too fast and will eventually need to be reined in. They are not quite so adamantly opposed to entitlement reform, in other words, as most Republicans are to tax increases.

It helps that Republicans such as Paul Ryan, a congressman and former vice-presidential candidate beloved by spending hawks, have proposed such radical overhauls that the sorts of reforms Mr Obama discussed last year look like mere tinkering around the edges. The increase in the eligibility age for Medicare he talked about need not start for several years and could be phased in slowly. By the same token, modifying Social Security’s indexation to inflation is a far cry from privatisation.

Moreover, Mr Obama is leader of his party in a way that Mr Boehner is not, thanks to the authority of the presidency and to the Democrats’ relative cohesion. Mrs Pelosi has a firm grip over her caucus; if anything, it is the centrists who tend to rebel, not the liberal fringe. Steny Hoyer, the number two in the Democratic hierarchy in the House, said this week that his party should not undermine negotiations by ruling out benefit cuts on principle.

Perhaps the best reason to suppose that Democrats may be less intransigent than they appear on entitlements, however, is that it is not their focus in the negotiations. Mr Obama has been banging on about higher taxes for the rich since his previous election campaign, yet the Republicans have managed to stymie them. Democrats in Congress, like the president himself, are determined to see them through this time. Success in that respect might ease the pain of entitlement reform.

"Passing more of the cost of the programme to drug companies (by haggling for lower prices)."

I love how small and dismissive the mention was of directly controlling the costs of drugs by price negotiations. Nevermind that by far the largest long term debt problem is the high costs of drugs, relative to other countries, and the use of unnecessary or wasteful procedures.

The article does't point out that directly controlling costs would actually save a lot more money than restricting access or coverage.

Why is there no talk of Defense spending cuts anymore? It's all entitlements and taxes. The cliff has a very large defense cut in it that we I assume, from both proposals, will just get wiped away. This is more upsetting than fringe updates to entitlements.

The term "entitlement reform" obscures more than it clarifies, which is precisely why the Republicans are so fond of it. Reducing medical insurance coverage for those over 65, or for the poor, or reducing tax funded pensions - all of these are terribly unpopular. Talking about "entitlement reform" can make one sound responsible and serious, while avoiding genuinely serious discussion of the problem. Let's look at it in more detail.

First Social Security. There's no significant problem here; what problem there is is demographic and short-term. Quite modest tax rate increases, or an increase in the income cap, or some combination, will make it solvent for the foreseeable future.

The real problem is with Medicare and Medicaid, and the root of the problem is the same as that of every other dispute over health care in the US - exorbitant cost. The US spends roughly twice what every other developed country spends on health care for no better results, and the rate of increase is much higher than elsewhere. This is not sustainable.

Actually fixing the problem requires figuring out how to provide medical care to people at a cost they can afford, whether paid for through taxes or otherwise. This is not easy. Merely transferring the cost from government to individuals doesn't help at all, and transferring it from Medicaid to much-less-efficient private insurance makes the problem worse. A genuine solution will require structural reforms to bring the cost of US health care under control. The reforms proposed by the Democrats so far have dealt with this problem tentatively at best.

Unfortunately, current Republican extremism defines the problem differently, and prevents any solution.. Access to medical care is not the problem, the fact that it’s paid out of tax revenue is. Anti-government ideology removes both the will to fix the problem of affordable medical care (it’s not government’s business), and the possibility of reforms which might actually control costs (Death Panels!! Horrors!!). They will, however, twist themselves into surprising contortions to avoid making this clear, Romney’s utterly cynical campaign ploy about “Obama cutting Medicare” being the best example.

So instead of a discussion of the real problem, even the Economist gives us gaily tinted hot air about ”grand bargains” and “entitlement reform. It’s enough to make one a tad cynical.

For every $100 dollars in corporate welfare cut (you know, using tax payers money to pamper business and redistribute from the poor to the rich), we'll cut $1 in personal solidarity welfare (you know, using tax payers money to help those in poverty and need, and redistributing from the middle class to the poor).

It's still immoral, but at least it'll show the reality of what's actually going on.

The Republicans are the champions for tax cuts: the Democrats are the defenders of social programs, at least that's what they want their respective constituencies to think of them. Both parties have agreed that revenue increases and spending cuts are necessary. Obama's initial offer is on increasing revenue - don't expect an offer on cuts to social programs. It's up to the Republicans to put on the table the specifics of government cuts. Somehow the Republicans don't understand the mechanics of negotiations: on revenue, the Democrats will start high, and on social programs, they will start low. Therefore, the ball is in the Republicans' court. Since they haven't answered, except saying the offer is not serious, Obama will get back to them when the Republicans get their act together. I think they won't. By Jan 2nd, when the Bush tax will have expired, Obama will suggest to the senate to pass a bill to cut taxes for those earning less than $250,000. The Republicans, the party of tax cuts, will be faced to strike down a bill that goes against their very own position. Ouch! Would that ever burn them!

I've read through nearly all the posts on this topic, posts from readers that lie all over the political spectrum and for the life of me I have yet to see one plausible program put forward by a Democrat/Liberal that truly addresses the nation's fiscal problem. Republicans are now conceding on higher taxes; meanwhile, Democrats are now signing pledges to never cut entitlements. As an independent, I look at the numbers and see Republicans more willing to compromise than Democrats, and with a plan that is more sensible for the nation as a whole.

Democrats seem to have only two possible solutions: 1)higher taxes on the rich; 2)cut defense spending. It has been pointed out repeatedly that those two things alone will hardly touch the projected deficits. You could tax every dollar from the top 2% (ignoring the financial armaggedon this would actually cause) and cut defense spending to nothing and the nation will still face a bleak fiscal future.

Is there a Democrat out there that can actually put forward a legitimate plan? Anyone?

"Social Security is off-budget and self-funded. It does not contribute to the deficit and therefore need not be considered in any plan to reduce the deficit."

Sigh. This has been debunked so many times.

Social Security collects money from everyone to pay everyone. Unfortunately, all that money that has been collected from everyone has been spent elsewhere - roads, bridges, god knows what else - meaning that in the future, when more money starts going out than coming in, the pot will have to be re-filled with the IOUs from other parts of the government that borrowed the funds. To repay those IOUs, either taxes will have to be raised or money will have to be printed (assuming no changes to the program as it exists right now).

You guys across the pond often do not get the true tenor of American politics in this time. Obama's insistence on the tax rate raise on the top brackets is only the down payment. There will be much more dealing that will discomfit both sides before this business is over. Yes, Social Security needs some tweaking, most especially indexing the top income levels from which the FICA tax is paid (up to $200,000 salary income and/or capital gains & dividend income), and the cost-of-living rates adjusted to reflect true COLA. Medicare will be rationalized as ObamaCare is fully implemented, which will happen well beyond 2014 and with many legislative and regulatory adjustments, hopefully resulting in a system like Germany's. But bottom line, the game is far from over and taxes will be reformed. I fully expect EVERYONE will take a hit, not just the 2% affected by the current (again) down payment.

DEMOCRATS just emphasize there will be no deal to resolve America’s fiscal mess unless Republicans agree to higher tax rates on the richest Americans and ignore themselves.
The answer depends on the elasticity of demand. And other measures maybe can affect it. Like the cost-cutting reforms to such entitlements as Medicare, the government’s health-care scheme for the old, and Social Security. And i think if control the social security in a reasonable price and increase tax of rich people may be cay effeciency.

TYPO THE COMMENT IS We are not alone as USA the power one is wobbling we may be left as Friday We are not alone as USA is wobbling and we may be left like Friday a loner The United States needs to raise taxes and cut spending to address the looming fiscal cliff, IMF chief Christine Lagarde said Sunday, warning that anything less would undermine economic confidence. With President Barack Obama and Republican lawmakers stuck in an apparently ideological battle on how to address the nation's ballooning deficit by the end of 2012, Lagarde said the cliff remained the biggest threat to the economy. Speaking on CNN's "State of the Union" talk show, she said that although the US economy was creating jobs, American debt was still higher than in much of the eurozone and cautioned against more half-baked, short-term measures. Following last week’s ECB rate decision, president Mario Draghi hinted on a rate cut possibly at their next meeting after reducing ECB’s forecasts for the euro zone’s economy. The Bundesabnk followed with its own lower forecasts. Draghi,also opened the door for a negative deposit rate. Will these measures help the Eurozone recuperate in 2013? In the US, the headline Non-Farm Payrolls numbers were OK, but probably not enough to stop Ben Bernanke. I thank you Firozali A.Mulla DBA

HyunSmith, You claim “America and the West are places based on irrational ideologies (much like outdated Communism) instead any reason/sensibility.” Yet your argument to support this assertion is nothing more than an invective filled harangue: “America and the West (Europe) are has beens, filled with morons, where idiotcy is prized over rationality.” Is that what you think makes you reasonable and sensible? Looks like you also need to work on that (and take some spelling, grammar, and punctuation lessons, too).

"What? Taxes will rise for the middle class? That's good - it is about time we face this taboo. "The rich (those bastards)" cannot solve the U.S. fiscal mess by themselves. The middle class should stop acting "Greek" and start paying more for the services it demands (and don't want to cut)."

Well see, your "radical Dems" are not really radical Dems. They are centrists who favor the middle class over the poor.

Now I on the other hand am a true "radical Dem." Which means I couldn't be bothered wringing my hands because a middle-class family can't afford a 3rd flatscreen TV, any more than I could care that the rich family with a tax rise will have a smaller wine cellar. The only programs I care about are those that help people who have true needs.

So let's go off the cliff, with the rich and middle class tied together at the waist. Bring it on.

"The increase in the eligibility age for Medicare he talked about need not start for several years and could be phased in slowly"
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Nothing changes despite the rhetoric: as always, the idea is to raise taxes now, cut expenditures later (or, let's get real, never).

And Mr Obama will not accept even $1 of cuts for $4 of new revenues... Funny how Mr Romney was criticized for not accepting the 10:1 deal, but no ones criticizes Mr Obama. As it is funny that Republicans are constantly criticized by signing off the no-new-taxes pledge proposed by Norquist, but political observers think that 29 Dem senators signing off a no-cuts letter is no big deal.

I agree with the radical Dems: let's go over the cliff. It's the only way this bloated leviathan of federal government will ever cut anything. What? Taxes will rise for the middle class? That's good - it is about time we face this taboo. "The rich (those bastards)" cannot solve the U.S. fiscal mess by themselves. The middle class should stop acting "Greek" and start paying more for the services it demands (and don't want to cut).